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Business groups have cautiously welcomed the Office for Budget Responsibility’s (OBR) move to downgrade the UK economic growth forecast for 2011, calling the figures “more realistic” than previous predictions.

The new independent fiscal watchdog, created by HM Chancellor George Osborne to monitor public finances, calculated that the economy will expand by 2.6 per cent next year, down from the 3.25 per cent previously estimated by HM Treasury Labour’s last Budget.

Uncertainty over bank lending, an unstable euro and a fragile labour market were all cited as reasons for the downward growth forecast by the OBR’s chairman, Sir Alan Budd.

According to Confederation of British Industry (CBI) director-general, Richard Lambert, the OBR’s report brought a “welcome dose of credibility” into economic projections for the next 12 months. The report confirmed the CBI’s view that the recovery would be slow and protracted, he said.

However, the OBR said the budget deficit and level of general debt would not be as bad as previously anticipated. The UK’s budget deficit would fall to 10.5 per cent of GDP in the 2010-11 financial year, down from the 11.1 per cent predicted by Labour.

But it was less optimistic about the structural deficit – the underlying hole in the economy is not expected to disappear as a result of growth. While the Labour Budget set this at 7.3 per cent of GDP in the current financial year, the OBR increased this figure to 8 per cent.

The British Retail Consortium director-general, Stephen Robertson, said there was nothing to be gained from hiding the severity of the downturn or the scale of the measures needed to tackle it.

“An honest and effective plan to tackle the public finances needs this more objective approach even though it confirms our fears about where the economy really is,” he said.

But the British Chambers of Commerce chief economist, David Kern, said the OBR’s growth expectations were still “overly optimistic”, with problems in the Eurozone and a faltering US economy likely to curb growth in the short-term.

For small firms, Kern said the picture was “far from bleak”, but the economy would recover at a slower pace than many businesses would like.

“Radical government spending cuts to reduce the deficit may also dampen business confidence and consumer demand, which could affect small firms,” he said. “What we need is less regulation to allow businesses to get through the recovery period.”